Report: Gap between state, local government spending and revenue to increase over time

State and local governments have seen an increase in tax receipts following declines in 2008 and 2009, with total collections up more than 12 percent in nominal (unadjusted) dollars between the second quarter of 2009 and the third quarter of 2012, according to a report released this week from the U.S. Government Accountability Office.

Most of the growth was in income and sales taxes, which were up more than 22 percent and just over 14 percent in nominal dollars. Property taxes grew at a rate of less than 2 percent from the third quarter of 2011 to the third quarter of 2012, the report said.

However, with modest growth projected, total tax revenues for state and local governments in the long term are expected to remain below 2007’s historical high through 2060, the GAO found. The sector will continue to adjust to a lower level of federal assistance than what was provided through the American Recovery and Reinvestment Act of 2009.

The report said the growing cost of Medicaid, a health-care program for the poor and disabled, and of health-care compensation for public employees and retirees are the primary reasons for the decline in operating balances.

“Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations continue to suggest that the sector would need to make substantial policy changes to avoid growing fiscal imbalances in the future,” the report said. “That is, absent any intervention or policy changes, state and local governments would face an increasing gap between receipts and expenditures in the coming years.”

Governments’ health-related costs are projected to be about 3.8 percent of the gross domestic product in 2013 and 7.2 percent of GDP in 2060. Other types of expenditures, such as salaries, are expected to decline as a percentage of GDP. Non-health-related costs will be an estimated 10.5 percent of GDP in 2013 and roughly 7.7 percent in 2060, the GAO found.

The GAO’s model projects property-tax receipts will increase gradually from 2.86 percent of GDP this year to 3 percent around 2060. State and local property-tax revenues won’t top the 2009 peak level of 3.09 percent until sometime after 2060. The agency said it’s unclear at this time what effect the Affordable Care Actwill have on the long-term state and local fiscal outlook.

Pension assets increased nearly 22 percent from $2.3 trillion at the end of 2008 to $2.8 trillion by the end of 2011. The 2007 value was $3.2 trillion. Most state and local government pension plans have enough assets to cover benefit payments to retirees for 10 or more years, but there is a growing gap between assets and liabilities. Governments have been taking steps to reduce any gap, such as reducing benefits and increasing member contributions.

Cara Matthews is a member of The Journal News' Tax Team. She has worked as an Albany correspondent and she covered Putnam County government and politics. Before that, she worked at newspapers in Connecticut and covered the state Legislature for one of them.